Published 4:00 am, Wednesday, September 13, 2000

2000-09-13 04:00:00 PDT STATE -- A state board is quietly granting utilities and large businesses millions of dollars in tax breaks as part of a policy shift that critics warn could drain billions from police, fire departments, roads, health clinics and schools.

Across California, property tax values set by county assessors on homes and commercial property are skyrocketing, jumping as much as 20 percent in some areas.

But the opposite is happening with electric utilities, telecommunications giants, oil pipeline operators and other private companies assessed by the state Board of Equalization -- even as the businesses profit in the red-hot economy.

Latest news videos

The property roll assessments of these companies, which include Pacific Gas and Electric Co. and Pacific Bell, are $12 billion less than they were 10 years ago. In the past year alone, the total has plummeted by $5.3 billion, which has the effect of reducing these businesses' tax bills by tens of millions of dollars.

The trend reflects a new tax-assessment philosophy by the Board of Equalization, which was established in 1879 to standardize or "equalize" appraisal practices across the state.

County assessors have openly revolted against the board, which is led by antitax stalwart Dean Andal, saying that the board is undermining California's property tax base by improperly granting big breaks to businesses. Critics contend that those breaks, coupled with new directives given to county assessors, are slowly shifting the burden of supporting public services onto homeowners and smaller firms with less clout.

"If they're going to create a break for business, they should do the same for mom and pop," said Jim Gallagher, Sonoma County's assessor.

In a little-noted vote last month, the Board of Equalization approved a policy that could drop assessments by $1 billion dollars for the state's three largest gas and electric utilities, reducing their taxes by an added $10 million.

Steamed county officials find this drop in state-assessed property values even more striking because that category is not subject to Proposition 13, which limits annual property tax increases to 2 percent for homes and businesses assessed by the counties.

Taxable values in the counties are soaring, despite the Proposition 13 limit, as a result of new construction and property sales. New owners pay taxes on the current market value of a property.

Board and industry representatives say the utility tax reductions are justified by a host of factors -- including the depreciation of aging equipment; the required sale, under the state's deregulation program, of power plants worth as much as $1.3 billion; a slowdown of new construction by energy utilities.

Andal said another reason for the tax reduction is the recent expiration of the terms of a complicated lawsuit settlement that "artificially propped up" the value of some companies.

He also points to the wave of deregulation that has swept across California. "A monopoly is a lot more valuable than a nonmonopoly," he said.

Those explanations are hard to sell to county assessors, who say they have lost trust in the board in recent years. They say Andal has injected a note of acrimony by publicly treating them like "revenuers" attempting to maximize taxes to support big government.

"I wouldn't call it a love-hate relationship," said Riverside County Assessor Gary Orso. "Unfortunately, it's more of a hate relationship."

Andal, a former GOP assemblyman from Stockton, acknowledges being plainspoken but says it is not his job to coddle the assessors, whose work is overseen by the board. "The system is not designed to be cooperative. It's a check and balance . . . put into place to protect the public interest."

Setting a value on a home or a business for property tax purposes is not a science, almost everyone who works in the field would agree. For each asset, appraisers try to pick the most appropriate method from a range of options.

Much of the conflict between county officials and the Board of Equalization boils down to a difference of opinion not only about how to assess property but what to assess.

County assessors say the board is promoting a philosophy of taxation contrary to state laws that call on appraisers to evaluate the fair market value of property or the price the asset would bring in an open sale where competitors are free to bid.

For example, an apartment building in a choice Richmond district location in San Francisco, bringing in millions in rent payments, would be worth more than an identical multifamily complex situated near the freeway in the city of Richmond, the assessors say.

Andal said he agrees with that clear example and would assess the San Francisco property at a higher rate. But he has steered the board away from considering income in the assessment of utilities, contending that method is fraught with danger.

For example, a restaurateur may make a very good income by hiring a charming host and a great chef. Andal insists that those are intangible factors that should not be assessed because doing so would come close to establishing a statewide double income tax.

In the same vein, he said, a cellular telephone firm derives part of its income from building a large customer list, an intangible that is valuable because people are unlikely to switch providers.

"It's not a building," he said. "It's not a telephone switch; it's not a fiber-optic line."

Instead, the board's assessment method focuses more on the cost of the physical asset minus the value lost through wear and tear -- its depreciation.

But assessors say this reduces the taxable value of older power plants, oil pipelines and telecommunications networks to their "scrap value," even though they may be part of systems that generate billions of dollars a year in revenues.

When the board codified its policy on intangibles by revising California's official Assessor's Handbook almost two years ago, county assessors -- for the first time in history -- refused to follow the guidebook.

They charged that the rules could cost California more than $2 billion in lost tax revenues. The handbook is not binding on the counties but provides ammunition for companies that appeal their assessments in court.

Republican board member Claude Parrish said the agency's assessments are fair.

"It's great to saber rattle and say, 'Hey, we need more money for our kids,' " Parrish said. "My job is to value things accurately."

"The value of utility property has been impacted by deregulation as well as other market forces," she said.

But Johan Klehs, a frequent dissenter in board votes, said that not all the reductions were warranted.

"I think some of these companies are very aggressive in their lobbying of board members," Klehs said. "There are also board members who are willing to give away the store."

Although the board's policies were changing from previous years, the full effect of the shift did not hit the utilities it assesses until this year. For the past decade, those property values have been controlled by a legal settlement that arose from industry court challenges in the early 1990s. The settlement expired last year, leaving the current board free to choose its own method.

Utility companies have seen huge changes over the past decade, while the court settlement was keeping their property values fairly stable.

Established telephone companies such as Pacific Bell were freed of most rate limits set by the state Public Utilities Commission, but they also lost a guaranteed return on investment and faced competitors investing in faster, cheaper technology.

The state's deregulation laws required gas and electric companies like PG&E to sell most of their power plants to private power generators, whose higher rates are now driving prices up in San Diego, the first area to face the full effect of electricity deregulation in California.

With Andal, Connell and Parrish forming a majority, both regulated and some deregulated utilities obtained multimillion-dollar tax reductions when their assessments were set in May.

PG&E's property value was reduced by about $2.6 billion, not counting the loss of roughly $1 billion from its valuation resulting from the sale of power plants.

Property tax values for Pacific Bell dropped roughly $2.2 billion. The board said the phone company was entitled to the decrease because it had to replace obsolete equipment and because deregulation had exposed the firm to competition.

Klehs, the frequent dissenter on the board, said the tax breaks should be passed through to telephone customers and electricity ratepayers. But consumer advocates and officials at the state Public Utilities Commission disagree over how easily -- and even whether -- those savings can be passed onto customers.

Pat Leary, an expert on revenue and taxation for the
California State Association of Counties
, says it is time for legislators to take a look at the potential effect of board policies on state revenues.

Leary said that effect is now masked by the booming economy, because the state is awash in healthy revenues from sales taxes and properties assessed by the counties. But she said the effect could be costly for counties with the next economic downturn.

All but two of California's 58 counties will see property tax losses this year from their share of the state-assessed roll. Attorneys representing California's counties have formed a committee to monitor the board, and may consider legal action if tax liability for the state-assessed firms is cut further.

"It is not justified. Their values have not gone down," said Sonoma County Counsel Steve Woodside. "Many of them are doing very well in the real world."

COUNTY LOSSES FROM DROP IN THE STATE UTILITY ASSESSMENT VALUE IN 2000-2001
Property value lost from the state roll, which is assessed by the Board
of Equalization, between 1999-2000 and 2000-2001. Corrected for power plants
sold, but not taking into account the additional tax break that
will probably be given the utilities on appeal this fall:
.
County Lost property value Lost taxes (approx.)
Alameda $67,307,410 $673,074
Contra Costa $237,748,640 $2,377,486
Marin $27,209,794 $272,097
San Francisco $36,000,000 $360,000
San Mateo $84,482,305 $844,823
Santa Clara (Up $36,475,594) (No loss; net gain $364,755)
Solano $62,743,467 $627,434
Sonoma $48,260,000 $482,600
Napa $25,059,900 $250,599

Latest from the SFGATE homepage:

Click below for the top news from around the Bay Area and beyond. Sign up for our newsletters to be the first to learn about breaking news and more. Go to 'Sign In' and 'Manage Profile' at the top of the page.